Evaluating Mortgage Insurance Options

You are at the lending institution signing all the mortgage documents and are asked if you want mortgage life insurance. The process seems simple enough, complete a questionnaire and for a few dollars a month you have coverage.

This very important question is often not given much consideration.

This article is aimed at educating the consumer about the various choices available for mortgage life insurance.

If you are obtaining insurance through a bank it falls under the category of a group mortgage insurance policy. The alternative is securing a customized, individual private insurance policy.
Provided are comparisons between the two opportunities.

An individual policy allows the policy holder to choose the beneficiary for the insurance proceeds. If you obtain mortgage insurance from the bank, because the mortgage lender is the policy holder, they automatically become the beneficiary of the proceeds.

If you are in good health and don’t smoke you will pay less with an individual plan. Mortgage insurance made available through banks will only consider the age of the borrower to determine rates, there is no preferred rate for “healthier” individuals.

If a borrower purchased term insurance, the rates are guaranteed for the entire term (typically 10 or 20 years). Most insurance policies with banks are not portable, so if you either pay off your mortgage or change lenders, the current policy would be terminated. If you change lenders and have since become uninsurable you will not be granted coverage. If you are able to obtain coverage, the new policy will come at a higher cost because the applicant’s age has increased.
An individual insurance policy holder can select any insurance amount. A group mortgage insurance policy will only cover the exact amount of the mortgage (no more, no less). The benefits of mortgage life insurance with the bank will decrease over time since your mortgage is being paid down, however, the cost remains level over the term. This is referred to as a decreasing term policy. The monthly payments are fixed but the benefit is declining because the insurance is in place only to pay off the existing mortgage, which is decreasing with each mortgage payment.

An individual policy allows the insured the ability to customize their plan by having the flexibility of incorporating the following: waiver of premium, child term, spousal term, guaranteed insurability, etc. Guaranteed insurability is important with term insurance. For illustrative purposes, if you select a term of ten years and after that time frame require continued protection, if this feature isn’t included in your policy, the insurance company can decline you coverage (if there is a change in your health). Keep in mind that a new term will cost more because of the change in age. Conversely, the bank insurance policy offers limited benefits.
An individual policy is available up to age 70 for term, 85 for permanent and 85 for universal life insurance. Many companies will not insurance clients beyond the age of 65 and coverage will end at age 70.

Premiums for an individual policy are guaranteed for the term of the insurance policy. On the other hand, premiums paid through a mortgage lender are on a group basis and therefore can be increases on a group basis if the experience of the group becomes unfavourable. For example, if the lender raises charges for the whole group, premiums can fluctuate.
The underwriting process for private insurance is done at the time of purchase. This means that there is virtually no chance of the insurer refusing to pay a claim should the need arise. This is in sharp contrast to the bank insurance which is not underwritten until someone dies. This means that the health questionnaire that was completed when you took out the policy will only be reviewed at time of death. If there is any reason to question the accuracy of the information, a claim may be denied.

The bank can collect premiums for years which would mistakenly lead the consumer to believe there is a valid, enforceable policy in place. Unfortunately this is not always the case. There are numerous horror stories of the insurance companies reneging on their obligations. There was an incident where a couple worked hard to able to afford to buy a home. They took out joint life insurance policies at their bank. Premiums were being deducted on a monthly basis. The husband unfortunately fell ill was hospitalized and subsequently passed away. The wife went to the bank with insurance forms in hand, hopeful of having the balance of the mortgage paid off. She shockingly learned her husband had been rejected for coverage. The wife demonstrated payments were taken out of her accounts. The bank staff apologized for the error and offered a refund of the premiums. Angered and feeling cheated the wife retained a lawyer to resolve this dispute. One year later, she could barely afford the mortgage payments plus she found herself with a legal bill of $25,000. If an applicant is going to be denied coverage it stands to reason this should be known from the onset. Unfortunately there are more and more “escape” clauses that allow claims to be disallowed which makes the insurance companies billions of dollars.

As a rule of thumb it is prudent to have insurance to cover major debts such as a mortgage. Don’t simply add mortgage insurance to your mortgage payment without giving this issue careful thought. There are good reasons to consider other options. Private insurance offers numerous benefits at usually no additional costs. Please take stock of your insurance needs and make certain you obtain adequate coverage for your largest investment.

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UFFI ~ Urea Formaldehyde Foam Insulation

UFFI’s origins can be traced back Europe where in the late 1950’s it was developed as a means to insulate difficult to reach cavities in house walls.

The ingredients typically consist of a mixture of urea formaldehyde resin, a foaming agent and compressed air. When this mixture is injected into the wall, urea and formaldehyde unite and “cure” into an insulating foam plastic.

In Canada, UFFI was approved for use in exterior wood-frame walls only. It has a good R value rating which is used as a measure to evaluate the insulation’s ability to resist heat flow.

Formaldehyde is colourless, but has a very strong odour. Formaldehyde is both a naturally occurring chemical and an industrial chemical. It can be found in diapers, cosmetics, paints, cigarette smoke, dry cleaning chemicals, gas appliances, wood stoves, fireplaces, no-iron fabrics, paper products, exhaust from fans and glue from particle board and plywood.

Typically formaldehyde levels in houses are .03 to .04 parts per millions. By contrast, typical levels in a smoking section of a restaurant would be .16 parts per million. Houses with new carpeting can also reach these high levels.

The rate at which formaldehyde gases are released from materials into the air depends largely on the temperature and humidity. The higher the temperature and humidity, the more gas is likely to be released.

Urea formaldehyde foam insulation was used primarily in the 1970’s in Canada. This was a period where there was a push to have more energy efficient homes. During this period there were financial incentives offered by the government to improve the insulation levels in homes across Canada. The government program was called CHIP (Canadian Home Insulation Program) and UFFI became an important insulation product for existing houses. There were an estimated 100,000 homes in Canada that were insulated with UFFI.

UFFI was also used throughout the United States during this same period. It has been used for over three decades in Europe and is still considered today to be one of the best insulation solutions for existing dwellings.

UFFI was banned in Canada in December, 1980.


Why was UFFI banned?

During the insulation process, there would be an excess of formaldehyde added to ensure complete “curing” with the urea to produce the urea-formaldehyde foam. That excess was given off during the curing almost entirely within one or two days of injection. If the UFFI was properly installed there may have never been any problems. However, there were instances where UFFI was either improperly installed or used in locations where it should never haven been. One of the first problem cases stemmed in the United States. This involved an inadequately ventilated, air-tight mobile home with a poorly mixed, half-formed UFFI.

A lab study in rats which produced nasal cancer in a formaldehyde environment where there was high levels added to the concern. There were numerous home owners that reported respiratory difficulty, eye irritation, running noses, headaches and fatigue.
The Canadian health authorities became concerned about the possible health risks and consequently banned the use of UFFI in December, 1980.

The Federal government set guidelines to remove UFFI where the formaldehyde gas was .1 parts per million or greater. This was a very conservative figure. The interesting challenge became apparent as houses were being tested, they couldn’t find any UFFI insulated homes with gas levels above .1 ppm. In reviewing several thousand files, there was not one house with levels of formaldehyde that remained above .1 ppm. (If there was an atypical reading that was over .1 ppm another reading was taken and invariably would produce a result of less than .1 ppm).
The presence of UFFI does not affect the level of formaldehyde in the house. However, if UFFI comes in contact with water or moisture, it could begin to break down. In these instances, UFFI should be removed by a specialist and the source of the moisture problem should be repaired.
In one of the longest and most expensive civil cases held in Canada, which took eight years to settle, it was concluded by Quebec Superior Court, that not only was there no basis for a settlement but the plaintiffs were required to pay the majority of the costs.

It appears that urea formaldehyde foam insulation has not been the health concern that it was initially thought to be. However, anytime there is a health risk, it is best to err on the conservative side.

When I first began my real estate career, UFFI was a much debated and controversial topic. Concerns of cancer and other health issues made it very difficult to sell a home which was insulated with UFFI. Even if the UFFI was removed, fetching market value because of the perceived problems was very difficult. Most buyers shied away from these homes. It was mandatory prior to 1993 for a mortgage insurer to have the seller sign a declaration stating that to the best of their knowledge and belief there was no UFFI used to insulate the home. Since 1993, a UFFI declaration has not been required.

Although, the focus on UFFI isn’t nearly what it used to be, as a seller the stigma may still hinder marketability. If your home does have UFFI you should enjoy your home and be assured that it is not the problem it was once feared to be.